The lion that could

  • 2010-06-02
  • Staff and wire reports

RIGA - At the present time, Latvia, in relation to the international lenders, is like a guinea pig, but the time has come for the country to become a little lion, said People’s Party leader Andris Skele on May 27 in an interview with the LNT show ‘900 seconds,’ reports news agency LETA. Skele believes that Latvia is not able, in the current economic situation, to pay back the loans given to it at the current terms, and so talks should be begun with the lenders over a reconsideration of repayment schedules and conditions, in a way similar to what the newly elected Hungarian government is doing, he asserts.

This is not the first time that Skele has publicly aired his opinion that the agreements with the international lenders are not favorable to Latvia and are not stimulating the recovery of the country’s economy, and should therefore be discontinued. In his opinion, the agreements do not allow the government to take decisions independently, and it should therefore find ways to re-finance the loans.

Skele has often compared social, political and economic processes to various animals. In 2009, he famously said that “the leader of the country must not look like a run-over hedgehog.” He has said, during his Jurmala - gate scandal, that in Jurmala they should elect the biggest “kretin” as vice-mayor.
Skele’s populist rhetoric exhibits a lack of understanding of government finance, and in how the IMF- and EU-led bailout plan works.

A similar misunderstanding is held by some other top officials in Latvia. The head of the State Audit Office, Inguna Sudraba, earlier complained about the bailout lending terms, seemingly hinting that Latvia will be unable to repay what it has borrowed from the IMF and EU, wrote Morten Hansen, Head of the Economics Department at SSE Riga in February on

Sudraba expressed concern that “Latvia will not have a single euro cent to repay the international debt, relying just on tax income.” Hansen writes that “Without the [loan] agreement with the IMF and EU in December 2008, Latvia would have faced a government default, a banking sector collapse and a currency collapse.” He continues that “Without borrowing, Latvia would be forced to balance its government budget. This would require substantially harsher cuts than have been implemented, leading to even fewer public services and even higher unemployment.”
The international loan package is on favorable terms. Of the IMF part of the loan, the weighted average interest rate “should be around 2.2 percent - dirt cheap compared to borrowing in financial markets, assuming Latvia could [borrow],” notes Hansen.

Repayment of the loans is such that each disbursement gets repaid in 8 equal quarterly installments, with first payment 3-1/4 years after disbursement. Therefore, repayments begin in 2012.
For the EU part of the loans, Latvia can now borrow “as if it were AAA rated (which it is not…) i.e. at interest rates as low as Germany’s. The loan may run up to 7 years,” says the chief economist.
As is typical when it comes to repayment of these loans, Latvia will have to rely on refinancing, or ‘rolling over,’ the debt on the public financial markets, “which is completely normal,” adds Hansen. It is hoped that by this time, Latvia’s, and the global, economy will have begun a strong recovery and its budget has been put in order, so that there will be interest from foreign investors to buy the country’s government bonds. These new bonds are what will be used to repay the IMF and EU funds. The loans are paid off over time, not in one lump-sum payment.

To highlight the difficulties, the political situation in Latvia is the most fragile of the three recession-hit Baltic States, as it faces a parliamentary election in October, according to a commentary on political risks in the Baltic States by the Reuters agency. However, Estonia and Lithuania are also working with minority governments, which could complicate the taking of unpopular but necessary decisions. Reuters recognized the most serious risk to Latvia as being October’s elections, which will most likely lead to another multi-party coalition government.
There is also a question over a possible softening of Latvia’s adherence to the IMF program by a new government, which could cause doubts on financial markets about the sustainability of the economy and renew the risk of a devaluation of the lat.

More political unrest over the international loan program comes from the People’s Movement ‘in favor of Latvia’ (PLL), who wants the government to invite the World Bank (WB) to change its proposals on the management of public spending. PLL believes that the mission’s proposals and recommendations are clearly directed against the Latvian national interests and pose a serious threat to the sustainability of the country.
The WB has suggested that the Latvian government make significant changes and painful cuts in the social sector in order to realize a reduction in the level of the budget deficit. The Bank considers, for example, that the funding of sports programs and special education institutions in Latvia is unnecessary. The WB’s latest report points out that subsidies allocated to local governments from the Education Ministry’s budget for funding special education institutions are disproportionately large when compared to other programs.

These subsidies, which reach 48.6 million lats (69.4 million euros) in the 2010 budget, are allocated to support special education institutions which are administered by local governments for students with special needs. If this is truly the intention of these funds, they are unreasonably large, as they are even bigger than the total budget of Latvia’s higher education establishments, says the report. Furthermore, the approach of isolating students with special needs in separate educational institutions is contradictory to global trends.
The WB delegation was in Riga from May 25 to May 28 to continue work on its review of Latvia’s expenditures.